FED bought a stunning 61% of all net US government debt issuance in 2011

[swissaustrian]

United States of Weimar:
The has FED bought a staggering 61% of all net US government debt issuance in 2011, says a former Treasury official:

Demand for U.S. Debt Is Not Limitless
In 2011, the Fed purchased a stunning 61% of Treasury issuance. That can't last.
The conventional wisdom that nearly infinite demand exists for U.S. Treasury debt is flawed and especially dangerous at a time of record U.S. sovereign debt issuance.
The recently released Federal Reserve Flow of Funds report for all of 2011 reveals that Federal Reserve purchases of Treasury debt mask reduced demand for U.S. sovereign obligations. Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis. This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.
Still, the outdated notion of never-ending buyers for U.S. debt is perpetuated by many. For instance, in recent testimony before the Senate Budget Committee, former Federal Reserve Board Vice Chairman Alan Blinder said, "If you look at the markets, they're practically falling over themselves to lend money to the federal government." Sadly, that's no longer accurate.

It is true that the U.S. government has never been more dependent on financial markets to pay its bills. The net issuance of Treasury securities is now a whopping 8.6% of gross domestic product (GDP) on average per annum—more than double its pre-crisis historical peak. The net issuance of Treasury securities to cover budget deficits has typically been a mere 0.6% to 3.9% of GDP on average for each decade dating back to the 1950s.
But in recent years foreigners and the U.S. private sector have grown less willing to fund the U.S. government. As the nearby chart shows, foreign purchases of U.S. Treasury debt plunged to 1.9% of GDP in 2011 from nearly 6% of GDP in 2009. Similarly, the U.S. private sector—namely banks, mutual funds, corporations and individuals—have reduced their purchases of U.S. government debt to a scant 0.9% of GDP in 2011 from a peak of more than 6% in 2009.
The Fed is in effect subsidizing U.S. government spending and borrowing via expansion of its balance sheet and massive purchases of Treasury bonds. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit. Similarly, the Fed is providing preferential credit to the U.S. government and covering a rapidly widening gap between Treasury's need to borrow and a more limited willingness among market participants to supply Treasury with credit.
The failure by officials to normalize conditions in the U.S. Treasury market and curtail ballooning deficits puts the U.S. economy and markets at risk for a sharp correction. Lessons from the recent European sovereign-debt crisis and past emerging-market financial crises illustrate how it is often the asynchronous adjustment between budget borrowing requirements and the market's appetite to fund deficits that triggers a shock or crisis. In other words, budget deficits often take years to build or reduce, while financial markets react rapidly and often unexpectedly to deficit spending and debt.
Decisive steps must be implemented to restore the economy and markets to a sustainable path. First, the Fed must stabilize and purposefully reduce the size of its balance sheet, weaning Treasury from subsidized spending and borrowing. Second, the government should be prepared to lure natural buyers of Treasury debt back into the market with realistic interest rates.
If this happens, the resulting higher deficit may at last force the government to make deficit and entitlement reduction a priority. First and foremost, however, we must abandon the conventional wisdom that market demand for U.S. Treasury debt is limitless.

Mr. Goodman is president of the Center for Financial Stability and previously served at the U.S. Treasury.

http://online.wsj.com/article/SB1000...googlenews_wsj

[WilliamC]

Yes, they are entering the final phase of the shell game.

But it's all about to fall apart...

[thoughtomator]

I'd wager that if there were not so much shrouded behind a veil of secrecy, we'd find the Fed bought ALL of it.

[dcjones]

I'd wager that if there were not so much shrouded behind a veil of secrecy, we'd find the Fed bought ALL of it.

Yes you are probably right.

This article states that the balance sheet of the fed would need to expand another 2 Trillion to keep ZIRP till 2014. I think that number is small because only the FED will be buying soon.

http://www.safehaven.com/article/242...sumes-printing

[dcjones]

I think when its common knowledge that only the FED is buying the debt you will start to see the $$ drop like a rock. The FED will have to choose to save the $$ or keep its ZIRP. This may happen by the end of the year IMHO. And by then it may be too late.

Next step would be to seize 401k accounts and replace them with treasuries call it eminent domain to get around the courts, which is when land or other property is seized “for the greater good.”

[WilliamC]

I think when its common knowledge that only the FED is buying the debt you will start to see the $$ drop like a rock. The FED will have to choose to save the $$ or keep its ZIRP. This may happen by the end of the year IMHO. And by then it may be too late.

Next step would be to seize 401k accounts and replace them with treasuries call it eminent domain to get around the courts, which is when land or other property is seized “for the greater good.”

That's what they would like to do, but it's unlikely that the vast majority of those who are now becoming aware of this will allow them to continue much longer.

Remember, they don't know the future better than anyone else and the more transparency there is the faster they fail.

Paradigm shift in 10, 9, 8, .....

[dcjones]

These things can happen quick and suddenly, when it breaks. And look so serine beforehand.

Even if it is common knowledge, people can stay complacent because others are not acting. If all my money is in bonds right now (and many are forced to be in them) I would be very close to the exit. Look for others to act is typically a wait and see.

What you need is a catalyst that will spook the people "in the know" out of the positions. This is when the mad rush to exit will happen, then everybody will be "in the know". It will get bloody, very bloody in the bond market when everybody is trying to exit at the same time thru a hole the size of a dog door while the house is burning. (apt use of metaphors, LOL)

[WilliamC]

Seems to be a lot of people heading for the exits this year...

http://www.thefiscaltimes.com/Articl...ket.aspx#page1

What CEO Musical Chairs Means to the Job Market

By MICHELLE HIRSCH, The Fiscal Times
February 23, 2012

After three years of relative stability in the corner offices of corporate America, 2012 is shaping up as a year of CEO musical chairs. That’s because a wave of executives are looking to step down, cash in their stock options as stocks rise and avoid new government regulations that many see as too challenging and stressful.

Yet, all of this managerial turbulence could shape up to be a blessing in disguise for job seekers and mid-and-lower level workers, corporate governance experts say. Executive changes often spur a domino effect of jobs opening up at multiple levels of the company after many CEO’s decide to bring in new players, said Mark Madden, Senior VP of Executive Search with B.E. Smith, one of the nation’s largest health care C-suite recruiters.

In particular, the revolving door is spinning faster among health care and financial services executives, who are jumping ship, retiring, or being forced out at a quicker clip than their counterparts in other industries. Last month, 25 health care CEOs and 13 financial services CEOs departed, making those sectors the two biggest culprits of the rising turnover tide.

A growing push from the federal government to police the financial services industry and clamp down on executive compensation is prompting the exodus of CEOs in the financial services industry, said Don Hambrick, a professor at Penn State’s Smeal School of Business who consults for financial services firms. This includes Dodd-Frank, the new Consumer Financial Protection Bureau. In the aftermath of the financial crisis, many financial chief executives reasoned that lending and business volume would return to normal once the crisis abated. “But by this point, the guys I speak with are beaten down…so with compensation on a tight leash, instead of slogging along in an industry whose best days are behind them, many are just deciding to play golf now, and sit on a board or two,” he said.

Hospital executives, too, are increasingly stepping down and moving into contract consulting work as President Obama’s signature health care law’s provisions start taking effect. “We’re seeing a growing number of executives kind of throw up their arms and say, ‘I’ve gone through major changes in health care, and I’m not really in a position where I want to go through this major change again,” Madden said.

At the same time, corporate boards are looking increasingly for new blood to steer companies past crisis mode – and their current CEOs can take a hint. Until now, boards in virtually all industries have avoided shuffling their executives, while executives themselves who might have otherwise wanted to retire or switch jobs held off either out of allegiance to seeing the company through a rough patch or fear that life at another company could be worse, said Matt McGreal, a principal at Crist|Kolder Associates, a CEO search firm.

“The devil you know is often better than the one you don’t. Your company may be in a bad situation, but the one you’re going to may be even worse, was how many executives were thinking,” McGreal said. “But those fears are starting to dissipate, and there’s definitely going to be greater volatility with top executives coming and going in the coming months.”

The number of CEOS who left their posts in January spiked by 48 percent over December, rising to 123 – the highest level since May 2010 according to data from outplacement service firm Challenger, Gray & Christmas. Fifty-one percent resigned or stepped down, 26 percent retired, and only 9 percent left to take other jobs. Last month’s high-profile CEO resignations include Wayne Gattinella, WebMD, who stepped down after the healthcare information services provider slashed its revenue outlook twice during 2011, and Fannie Mae's Michael Williams, who is stepping down amid increasing criticism for helping spur the housing market collapse and collecting billions in taxpayer bailout funds.

While changes at the top may unnerve some employees, rarely do CEO switches bring about mass terminations of existing employees, he said. Instead, CEO churning often translates into strategy changes “which often creates some real opportunities for people lower down the food chain to be promoted in the new order of things,” McGreal said.

[Constitutional Paulicy]

Fed Is Buying 61 Percent of U.S. Government Debt
Written by Bob Adelmann
Thursday, 29 March 2012

In his attempt to explode the myth that there is unlimited demand for U.S. government debt, former Treasury official Lawrence Goodman explained that there is high perceived demand because the Federal Reserve is doing most of the buying.

Entire article...... http://www.thenewamerican.com/econom...overnment-debt

[WilliamC]

Ties in with this headline from Drudge today...

http://www.cnbc.com/id/46923999

'Massive Wealth Destruction' Is About to Hit Investors: Faber
Published: Monday, 2 Apr 2012 | 8:12 AM ET
CNBC.com Senior Writer

Runaway government debts have triggered uncontrolled money printing that in turn will lead to inflation that will decimate portfolios, according to the latest forecast from "Dr. Doom" Marc Faber.

Dr. Marc Faber
Axel Griesch | ASFM | Getty Images
Dr. Marc Faber
Investors, particularly those in the "well-to-do" category, could lose about half their total wealth in the next few years as the consequences pile up from global government debt problems, Faber, the author of the Gloom Boom & Doom Report, said on CNBC.

Efforts to stem the debt problems have seen the Federal Reserve [cnbc explains] expand its balance sheet to nearly $3 trillion and other central banks implement aggressive liquidity programs as well, which Faber sees producing devastating inflation [cnbc explains] as well as other consequences.

"Somewhere down the line we will have a massive wealth destruction that usually happens either through very high inflation or through social unrest or through war or credit market collapse," he said. "Maybe all of it will happen, but at different times."